Introduction

The Consumer Financial Protection Bureau (“CFPB”) on November 30, 2022, filed an amicus brief in the United States Court of Appeals for the Fourth Circuit, arguing that the United States District Court for the District of Maryland erred in Lyons v. PNC Bank, N.A., when it “narrowed” the application of Regulation Z. At issue was whether the Truth in Lending Act (“TILA”) § 1666h(a) precluded PNC Bank, N.A. (“PNC”) from unilaterally withdrawing funds from one of its customer’s deposit accounts to satisfy an outstanding payment on their HELOC account. If adopted by the Fourth Circuit in the appeal, the CFPB’s position that the Lyons court erred and its interpretation of Regulation Z could impact the collectability of HELOCs. This OnPoint reviews the CFPB’s arguments and what this could mean for entities that acquire or securitize HELOC loans.

Background

TILA was enacted in 1968 and was designed to protect consumers and promote “the informed use of credit.”¹ The rules that govern implementation of TILA are referred to as Regulation Z. The Real Estate Settlement Procedures Act (“RESPA”) was enacted in 1974 and applies to loans for residential property.² The rules that govern its implementation are referred to as Regulation X.

In Lyons, among other issues, the plaintiff Lyons argued that PNC’s HELOC product, which included a card through which his line of credit could be accessed, was a “credit card” secured by real property and therefore the bank had violated TILA and RESPA.³ The Lyons court rejected both claims, finding that a HELOC loan, or home equity plan, which can be accessed by a credit card does not constitute a “credit card plan.”⁴ In its analysis of Lyons’s TILA claim, the district court explained that other sections of TILA and Regulation Z specifically account for distinct rules that apply to “home equity plans.”⁵ Moreover, the Lyons court highlighted that under 1026.2(a)(15)(ii) in Regulation Z, the term “credit card account under an open-end (not home-secured) consumer credit plan” explicitly excludes a home equity plan that can be accessed via a credit card. Although Lyons could use a credit card to access funds from his HELOC loan, the Lyons court held that § 1666h(a) did not apply to his account.⁶ Therefore, the court reasoned that “[h]ome equity plans, which are secured by real property, are simply different from credit card plans, which are not.” The Lyons court further recognized Congress’ express delegation of authority to the CFPB, which has exempted certain products, like HELOCs, from RESPA, notwithstanding that Congress may have intended RESPA to apply to “any loan . . . which is secured by a first or subordinate lien on residential real property. . .”⁷ Lyons appealed the decision to the Fourth Circuit on November 23, 2022.

The CFPB’s Amicus Brief

Although the CFPB agreed with the district court’s analysis of Lyons’s RESPA claim under Regulation X, it took issue with several of the district court’s conclusions in its amicus brief.

The CFPB principally argued the district court “narrowed” Regulation Z’s offset provision when it held that the undefined term “credit card plan” does not include a home-equity plan, or HELOC, that can be accessed by a credit card. The pertinent Regulation Z provision states that “[a] card issuer may not take any action . . . to offset a cardholder’s indebtedness arising from a consumer credit transaction under the relevant credit card plan against funds of the cardholder held on deposit with the card issuer.” The CFPB contended that the term “credit card plan” encompasses a home equity plan that can be accessed by a credit card, and therefore, the district court had erroneously relied on 1026.2(a)(15)(ii)⁸when it “narrowed” the offset provision by excluding HELOCs from the definition of “credit card plan.”

First, the CFPB disagreed with how the district court gave meaning to the term “credit card plan” under Regulation Z. Specifically, the CFPB argued the district court erred when it conflated the meaning of the terms “credit card plan” in 1026.12(d)(1) with “credit card account under an open-end (not home-secured) consumer credit plan” under 1026.2(a)(15)(ii). Although the phrase “credit card plan” is not defined under TILA or Regulation Z, the CFPB asserted the plain text of each phrase renders them different terms. The CFPB argued that while the first term “refers broadly to a credit card plan . . .” and the second term refers to a smaller subset of open-end credit plans that are not secured by a home, the term “credit card plan” should nevertheless be construed broadly to comport with TILA’s remedial purpose to protect consumers.

Second, the CFPB argued the district court erred when it ignored the historical context of how the two terms became part of TILA and Regulation Z. The CFPB emphasized that the term “credit card plan” has been in use since the 1970s, while the term “credit card account under an open-end (not home-secured) consumer credit plan” in 1026.2(a)(15)(ii) was recently added in 2010 to an unrelated amendment to TILA. Therefore, the CFPB contended, it would be inconsistent to use the newer unrelated defined term in 1026.2(a)(15)(ii) to discern the meaning of the older term “credit card plan.”

Lastly, the CFPB asserted the district court’s application of the term “credit card account under an open-end (not home-secured) consumer credit plan” in § 1026.2(a)(15)(ii) to TILA’s offset provision runs contrary to the CFPB’s longstanding official interpretations of Regulation Z. To support its position, the CFPB pointed out that Regulation Z’s offset provision applies to accounts that are excluded from § 1026.2(a)(15)(ii). Specifically, the CFPB argued that the offset provision “includes debts incurred by accessing an overdraft line of credit with a debit card.” The phrase “credit card account under an open-end (not home-secured) consumer credit plan” explicitly excludes overdraft lines of credit which are accessed by a debit card,⁹ though, so the district court’s application of the term in § 1026.2(a)(15)(ii) to the offset provision would not make sense.

In sum, the CFPB has asked the Fourth Circuit to broadly construe the meaning of the undefined term “credit card plan” in TILA and Regulation Z to include HELOC loans.

What’s Next

Additional arguments on the Lyons appeal are expected this year. If the Fourth Circuit adopts the CFPB’s arguments in its ruling, it would remove one tool issuers of HELOC loans currently have to ensure repayment of outstanding debt on their customers’ legacy HELOC accounts. These issuers may wish to consider adding RESPA compliant provisions to their agreements with customers in order to continue current market practice. Further, until we have further clarification from the court, issuers of securities backed by HELOC loans might also want to consider adding a risk factor to their transactions stating that amounts owed under a HELOC may no longer be collectible from the deposit accounts of their customers and any such inability to collect may have a material adverse effect on the timing of payments on their securities if alternative means are not as effective.

Moreover, if adopted, the CFPB’s “broad” interpretation of Regulation Z’s offset provision could expand the scope of protection to transactions utilizing an overdraft line of credit to more than just HELOCs. Specifically, the CFPB’s argument included “any indebtedness incurred by accessing an overdraft line of credit. . .” as being covered by the offset provision “so long as there is some sort of credit card associated with the account.” Notably, Regulation Z broadly defines “credit card” as “any card, plate, or other single credit device that may be used from time to time to obtain credit.”¹⁰ and “credit” as “the right to defer payment of debt or to incur debt and defer its payment.”¹¹ Accordingly, given these two broad definitions, borrowers could have more leeway in arguing that arrangements similar to HELOCs, irrespective of a card component, are nevertheless accorded protection under Regulation Z.

* Jared Goldstein, Law Clerk, co-authored this OnPoint.

Footnotes

1. See 15 U.S.C. § 1601; see also Truth in Lending, Federal Register, https://www.federalregister.gov/truth-in-lending-regulation-z-.
2. See Real Estate Settlement Procedures Act, https://www.federalreserve.gov/boarddocs/supmanual/cch/respa.pdf.
3. See Lyons v. PNC Bank, N.A, 1:20-cv-02234-SAG, 5‒8 (D. Md. 2022); see also 15 U.S.C. § 1602(1) (noting that the term “credit card” refers to “any card, plate, coupon book or other credit device existing for the purpose of obtaining money . . . on credit.”) (citation omitted).
4. See Lyons v. PNC Bank, N.A, 1:20-cv-02234-SAG, 6 (D. Md. 2022).
5. Id. See 15 U.S.C. § 1647; 12 C.F.R. § 1026.6(a).
6. See Lyons v. PNC Bank, N.A, 1:20-cv-02234-SAG, 6 (D. Md. 2022). Notably, the Lyons court acknowledged the underlying policy implications making it “understandable why Congress might give financial institutions more leeway to allow withdrawals from depository accounts when there is outstanding debt on a HELOC if such action might preserve a customer’s home.” Id. In the alternative, “[n]o such loss of a basic necessity is associated with collections efforts on an unpaid credit card account.” Id.
7. Lyons v. PNC Bank, N.A, 1:20-cv-02234-SAG, 7 (D. Md. 2022) (citation omitted); see 12 U.S.C. § 2602(1)(A).
8. See § 1026.2(a)(15)(ii) (“Credit card account under an open-end (not home-secured) consumer credit plan means any open-end credit account that is accessed by a credit card, except: (A) A home-equity plan . . . that is accessed by a credit card.”); see also § 1026.2(a)(15)(ii)(B) (“An overdraft line of credit that is accessed by a debit card. . .”).
9. See § 1026.2(a)(15)(ii)(B).
10. § 1026.2(a)(15)(i).
11. § 1026.2(a)(14).